Bernie and the bankers – the Constantin case and impact on the governance of F1

The 20th February 2014 could well be a watershed day for Formula One (“F1”). On that day, an English High Court judge (Newey J) found that Bernie Ecclestone, established supremo of F1 since the 1970s, had successfully defended a civil claim for $140m from Constantin, a German media company, following the sale of F1 to CVC Capital Partners (“CVC”), a private equity company, in 2006.

His co-defendants were Stephen Mullens, Bernie’s long time legal adviser, Bambino Holdings Limited (“Bambino”), a Jersey company wholly owned by the Bambino Trust of which Bernie’s former wife and two daughters are beneficiaries, and recently jailed disgraced banker Dr Gerhard Gribkowsky. However, the full 114-page judgment reveals a corporate and sporting soap opera that leaves the 83-year-old Mr Ecclestone in a vulnerable position. In this article, I will distil the judgment (Constantin Medien AG v Bernard Ecclestone and Others [2014] EWHC 387 (Ch) into the key issues, evidence and findings in the context of the on-going uncertainty surrounding the future governance of F1. The numbers of relevant paragraphs from the judgment are in referred to throughout the article in [square brackets].

Setting the scene

The basic premise for the claim by Constantin was that, pursuant to an alleged corrupt agreement between Mr Ecclestone and Dr Gribkowsky at the time F1 was sold to CVC for $2 billion in 2006, the shares in F1 were sold at an undervalue.

One entity that owned shares in F1 at the time of the sale to CVC was Bayerische Landesbank (“BLB”), a German bank. [1] BLB acquired these shares back in 2003 from a previous German investor in the ‘Formula One group’ of companies Formel Eins Beteiligungs (“FEB”). BLB, along with two other syndicate banks (“the Banks”), had lent FEB a significant sum of money to buy their shares in F1 and when FEB collapsed the Banks enforced their security attached to the loan and acquired the shares in F1 in proportions relative to the amount of money each of them had leant.

In order to acquire the shares of another investor in F1 at the time, EM.TV, in a separate transaction, BLB agreed to grant “overage rights” to EM.TV over the shares. Overage rights are an amount the buyer of shares will pay to the seller should they realise a specified uplift on the shares on a later sale. In this case, BLB agreed to pay a percentage of the excess to EM.TV if it sold its 62.2% interest in F1 for more than $1,057.4 million before 31 December 2007. [22-27] EM.TV’s legal successor became Constantin.

Bernie the F1 emperor

Mr Ecclestone’s journey in F1 began in the 1950's as a manager and then soon after as a team owner. However it wasn't until the mid-1970s that his path to F1 emperor began when he became a member of the Formula One Constructors Association (“FOCA”) and took an increasingly active role in negotiating F1's commercial broadcast deals. His success in this regard by increasing the sport's exposure, thereby driving its popularity, alongside improving the safety of a sport that was unfortunately synonymous with driver fatalities, brought him great respect and power within the sport. So much so, in the mid-1990s his own company became the commercial rights holder of F1 taking over from FOCA.

Through his unique vision and passion for the sport he, along with other influential figures in the sport during these years, particularly Mr Ecclestone’s close friend Max Mosley, who became Fédération Internationale de l'Automobile (“FIA”) President between 1993 and 2009, continued F1’s unprecedented commercial success of the sport through expanding the grand prix globally into new territories for F1 outside of its European heartland to countries such as India, China, Abu Dhabi, Singapore and this year Russia, charging the countries huge sums of money for the hosting privilege. As a result, it is now the most watched global sport outside of the Olympics and the football World Cup.1The author has admirationfor Mr Ecclestone’s remarkable achievements and for becoming almost irreplaceable as the head of F1.

The factual and legal issues at hand

The burden of proof to show that there was an undervaluation of the shares rested with Constantin, and the standard of proof to be achieved was the civil “balance of probabilities” standard (i.e. a 51% or greater chance). It is important to make it clear at this early stage that Mr Ecclestone was not on trial for bribery, which is a criminal offence.

There were three key factual issues to be decided:

Why were the alleged corrupt payments made?

Would BLB’s shares have been sold for more but for the alleged corrupt payments?

Oral witness evidence was given by Mr Ecclestone, Mr Mullens, a representative of Bambino, and the head of CVC, Donald Mackenzie. Constantin also put forward evidence of Dr Gribkowsky that had been revealed in the German criminal proceedings against him on the same facts (more of which below).

What about F1’s governing body and the teams?

The so-called ‘Formula One group’ of companies (Formula One Administration Limited and Formula One Management Limited, both wholly owned by Formula One Holdings, who is wholly owned by SLEC Holdings Limited, who is then wholly owned by Bambino) (“the Group”) have been granted the commercial rights of F1 to exploit by the governing body the FIA until 2110. [17] Since its inception, Mr Ecclestone has been the CEO of the Group. These are the key rights for F1 to be a commercial success. To acquire these commercial rights for such an extraordinary period of time cost the Group $313 million. This was lent to the Group partially by Bambino but the majority of the loan was provided by the aforementioned FEB. The FIA has a purely regulatory role when it comes to F1.2

Yet the rights are only commercially valuable to the Group if another key stakeholder in the sport, the teams, are tied in to participate. Therefore, Mr Ecclestone came up with the tripartite “Concorde Agreement” which governs the relationship between the FIA, the Group and the teams, and the payments to the latter to secure their involvement in the sport. [18] At the time CVC were negotiating with the Banks to buy their shares and take control of F1, the teams were putting plans in place to form a breakaway series at the expiry of the most recent Concorde Agreement in 2007. [41-42] However, the sixth Concorde Agreement was finally signed in 2009. [94-98]

Bernie tries to side-line the Banks

Having run F1 commercially with almost unfettered power for more than 30 years, it is clear from the judgment that Mr Ecclestone was uncomfortable with the Banks getting involved in any way with the running of the sport when they began to enforce their security in 2002. [211] Indeed, Mr Mullens, in his evidence to the Court said: “We thought that it would be a catastrophe if the banks had too much say in the negotiations with the [teams]…[Bernie] saw the banks as a very real threat to his ability to manage the Group as he wished”. [213 & 218] This was reflected in two incidents between 2002 and 2004, whereby Mr Ecclestone, with the aide of his trusty legal advisor Mr Mullen, attempted to protect his role by marginalising the Banks, despite them having a majority shareholding. First, he attempted to appoint board members of Bambino as directors of the Group and, secondly, he issued a controlling share in the Group to himself. Unsurprisingly, the Banks litigated. A settlement was agreed in August 2005 whereby he had authority to bind the Group for matters that weren’t reserved (i.e. not in the “ordinary course of business”), and he could not be removed while Bambino retained at least a 5% interest in the Group. However, according to the judgment this was not good enough for Bernie. [34-40]

Bernie and the rouge banker engineer a sale of F1

Upon becoming majority shareholder in the F1 Group in 2003, BLB set up a dedicated team of their bankers to manage their new investment, headed by Dr Gribkowsky. In the next two years, Dr Gribkowsky became closely involved and highly knowledgeable about the business of F1.

In the evidence provided by Dr Gribkowsky from the German proceedings, he revealed that in May 2005, shortly before the settlement was agreed with the Banks, he met with Mr Ecclestone in London. At this meeting Mr Ecclestone allegedly assured Dr Gribkowsky that he would “look after him” if he helped Mr Ecclestone with a sale of F1 to a bidder of his choosing. Following this meeting, Dr Gribkowsky took steps to set-up a consultancy firm. [169-171] This ‘agreement’ formed the basis for Constantin’s allegations of corruption and illicit payments between the two. Indeed, further evidence presented to Newey J from another member of BLB’s dedicated F1 team indicated this informal approach was the way in which Mr Ecclestone does business: “Ecclestone was someone with whom a handshake agreement was valid. If he promised something, he also abided by that promise.” [253]

Having met at a lunch in August 2005, Mr Ecclestone (with the aid of Dr Gribkowsky) convinced Mr Mackenzie of CVC, after negotiation, to finally pay $2 billion for the Group. BLB was paid $829 million for its shares, not enough to trigger payments to Constantin under the overage rights, and Bambino about $445 million. Upon completion, Mr Ecclestone was appointed CEO and Dr Gribkowsky a director of the new holding structure of the Group. [43-65 and 93] Mr Mackenzie explained retaining Dr Gribkowsky after the sale: “[CVC] thought it would be better to keep him inside [the Group] with the confidentiality that would come as being a director. But we saw him only as a non-executive director. And we disclosed that, obviously, to BLB, so that there were no conflicts of interest.” [246]

On the face of it thus far this is just a pure commercial negotiation with a single interested party. Yet, given what a financially successful sport F1 was at this time (and continues to be), why did no other buyers at least express an interest? This was the part of Constantin’s claim. Indeed, if you couple this suspicion with the fact that when there is at least one more potential buyer for a business the price increases, perhaps beyond the overage trigger, then one can start to see why they were more than a little upset.

Alleged corrupt payments between Bernie and Gribkowsky

In November 2005, during the negotiation of the sale of the F1 Group to CVC, BLB (negotiated by Dr Gribkowsky), Bambino and Mr Ecclestone entered into a written agreement, drafted by Mr Mullens, by which Bambino and BLB agreed to pay Mr Ecclestone an amount equal to 5% of what they received for their shares in the Group if the sale went through. They agreed to do this in essence as a “thank you” to Mr Ecclestone for arranging the deal with CVC. For tax purposes, this agreement was described as a “consultancy agreement”. Following completion of the deal on 26 March 2006, Mr Ecclestone was paid a total of $63.7 million by the two parties. [85-89]

Then just before the sale to CVC, following the ‘agreement’ in May 2005, Dr Gribkowsky began negotiations with Mr Ecclestone about an advisory arrangement whereby Dr Gribkowsky would become an advisor to the F1 Group separately to his appointment as a director of the new post-completion group. Part of these negotiations was a now infamous meeting at the Rib Room restaurant on 10 May 2006 between Mr Ecclestone, Dr Gribkowsky and Mr Mullens. At this meeting, Mr Ecclestone told Dr Gribkowsky he would pay him $45 million while Mr Mullens would draft the agreement and process the payments. [169-179 and 233] In the draft advisory agreement, Mr Mullens ensured Mr Ecclestone was not a party and his name was not included anywhere in the document. Rather, it was between special entities established by both Bambino and Dr Gribkowsky. Under that advisory agreement, and a subsequent similar agreement, entities controlled by Dr Gribkowsky were paid $44 million by entities controlled by Bambino. [107-123]

German authorities began an investigation in February 2010 into the activities of Dr Gribkowsky whilst at BLB. During these investigations, the two arrangements came to light and, on 2 February 2011, with the press beginning to question Mr Ecclestone’s and CVC’s links to Dr Gribkowsky [144], Mr Ecclestone admitted the transactions to Mr Mackenzie. Mr Mackenzie told Mr Ecclestone that he was extremely unhappy and that his failure to disclose the transactions was a clear breach of the share sale agreement. [150] Dr Gribkowsky eventually admitted to German criminal charges of corruption, breach of fiduciary duty and tax evasion and was sentenced to 8 years and 6 months imprisonment on 27 June 2012. [153-155]

The Bambino trust, Mr Ecclestone and tax

Earlier in this article, I described the legal structure of the F1 Group. Although it is not unusual to have offshore companies involved in such a group to ensure efficient tax planning, any layperson may well be suspicious of such a complex and opaque corporate structure. In fact, a submission to the BLB management board at the end of March 2005, signed by Dr Gribkowsky, said, “[Bernie] headed up and continues to head up the predominantly non-transparent and unnecessarily complex [F1 Group] like ‘a lord of the manor’. His business methods are not transparent and on occasion in a very grey area.” [219]

In his evidence, Mr Ecclestone revealed indeed that the UK tax authorities (‘HMRC’) were suspicious and that if they in fact decided that he was in de-facto control of the Bambino trust, rather than the trustees on behalf of the his ex-wife and two daughters as beneficiaries, then his potential liability would run into hundreds of millions of dollars. [180]

As is often the case with powerful individuals in sport, sometime after the sale, relations soured between Mr Ecclestone and Dr Gribkowsky. Mr Ecclestone claimed that this potential tax issue made him vulnerable to Dr Gribkowsky who had been close to his financial affairs, and allegedly threatened to “shake him down” to HMRC, and so he said, “I paid him…a very small amount, what I called an insurance policy. It is quite cheap insurance as it happened…there was never a bribe…I made a payment to Gribkowsky for completely different reasons. I had no reason to bribe him. I paid him money not to do what he said he could and was capable of doing, which was informing [HMRC] that I was running the [Bambino] trust.” [181] This is also what he told the directors of Bambino to convince them to enter into the advisory agreements on his behalf with Dr Gribkowsky. [204] Unfortunately for Mr Ecclestone, following a witness statement from Dr Gribkowsky stating unequivocally that he had never seen any sign of Mr Ecclestone controlling or influencing the family trust, Newey J found his, “blackmail/'shakedown' story…thoroughly implausible”. [270]

In Newey J’s opinion, on the balance of probabilities, Mr Ecclestone did enter into a corrupt agreement with Dr Gribkowsky starting in May 2005, with Mr Mullens being complicit in the agreement, and most importantly he found that, “the payments represented a bribe”. [270-274]

The judge finds a bribe but were the shares sold at an undervalue?

Despite this somewhat damning finding by the Court, this was not the key legal issue to be decided. The next decision for Newey J to make, in what one must remember was a civil damages claim, was whether there was a risk that the shares in the F1 Group would be sold at an undervalue as a consequence of the corrupt agreement? [274 and 297]

Given the prevailing climate in the sport at the time of the sale, with the uncertainty surrounding the crucial Concorde Agreement, it was a particularly risky investment for CVC. This was evidenced by the considerable difficulties they had in raising loan capital from banks to finance the purchase of the shares, as is common in private equity transactions. [124] Indeed, Mr Mackenzie said in his oral evidence that the business was not in a marketable condition in 2005. [282] Further, BLB and CVC both often made investment decisions without the use of financial consultants to provide them with a further indication of the true value of a business. [279] Constantin was not able to produce enough evidence to persuade Newey J that CVC could have been persuaded to pay more than it in fact did for BLB’s shares. He held that “[o]n balance, I consider that Constantin has not proved that, had it not been for the corrupt agreement Dr Gribkowsky had made with Mr Ecclestone, BLB would either have looked for an alternative buyer in 2005 or deferred the sale of its shares to a later date.” [298]

Therefore ultimately Mr Ecclestone won the case, as he did not have to pay any damages to Constantin. [370-371]

Potential future impact of the findings on the governance of F1

You will note in that in this article I have focused to a greater degree on the circumstances surrounding the alleged corrupt agreement between Mr Ecclestone and Dr Gribkowsky than the ultimate legal outcome of the case. The reason for this is the proceedings that remain outstanding in Germany (detailed in the next paragraph), and the impact the findings of Newey J may have on those and the governance of F1.

Subsequent to the successful criminal prosecution of Dr Gribkowsky, following an admission of the charges against him whereby he was sentenced on 27 June 2012 to 8 years and 6 months in prison, the German authorities have now formally charged both Mr Ecclestone and Mr Mullens,3 with the former’s trial due for April this year. In his judgment, J Newey made specific comments (when he didn’t need to) on the witness evidence presented to him in the Court by Mr Ecclestone including:

“Even, however, making allowances for the lapse of time and Mr Ecclestone’s age, I am afraid that I find it impossible to regard him as a reliable or truthful witness.” [160]; and

“…the evidence given by Mr Ecclestone and Mr Mullens contains inconsistencies and is otherwise unsatisfactory”. [270]

When such comments are coupled with Newey J’s belief that there was a corrupt agreement and bribes paid between Mr Ecclestone and Dr Gribkowsky, and the criminal charges brought against Mr Ecclestone in Germany on the same facts, one would think that Mr Ecclestone’s position as chief of F1 was untenable and/or he would have been asked to stand down by CVC. Indeed in any sport other than F1 there is little doubt this would have happened. However, given Mr Ecclestone’s tenacious personality and being the commercial keystone of the sport, he has merely stepped down from the F1 Group’s management board yet retains day-to-day operational control, with increased oversight from the management board and no authority to enter into “significant contracts”.4

In one sense, Mr Ecclestone is right to hold steadfastly to the innocent until proven guilty principle, especially as Newey J’s findings regarding alleged corruption were only on the civil balance of probabilities standard of proof. The criminal standard of “beyond reasonable doubt” that the German authorities will have to prosecute him under is far more stringent and they may not have the necessary evidence to secure a successful prosecution. Regardless, when considering the principles of good governance which are becoming ever more important in sport, the perception to all stakeholders of the integrity of both Mr Ecclestone and the sport being dragged through Court’s around the world, with a civil appeal pending in the United States from another private equity firm claiming that the alleged conspiracy thwarted its efforts to buy the F1 Group5 [159] and Swiss criminal prosecutors also investigating, is not a good one. However, during its time of investment in the sport it appears CVC have taken a very much hands-off approach and let Mr Ecclestone run it almost unfettered to make it one of the most valuable brands and successful investments CVC has ever had. [129] This now means there appears to be a lack of succession planning should Mr Ecclestone be sent to prison in Germany with successful Red Bull F1 team principal Christian Horner and former Sainsbury’s supermarket head Justin King being linked loosely with the job. Yet Mr Mackenzie admitted during the English civil trial that of course Mr Ecclestone would have to be removed should he be convicted of the criminal charges in Germany.6

There are also other issues external to the case that suggest Mr Ecclestone’s time at the top of the sport is coming to an end. The most obvious being his age: Mr Ecclestone is 83 and, although one cannot help but admire the longevity of his success and undoubted energy, he cannot go on forever, especially in such a global sport with so much travel. Not to mention good governance principals in sport suggesting executive term limits and a cap on the age of sport executives (Sepp Blatter and FIFA being a prime example of where this can impact negatively on a global sport).

His quest to take the sport around the world and to new territories appears to have hit the buffers slightly in recent times, partially due to the fees Mr Ecclestone charges to host a grand prix, which has also meant traditional F1 countries and circuits are no longer on the calendar. Korea and India being examples of new world grand prix that only lasted 4 and 3 years respectively and France an example of a traditional F1 country that no longer has a grand prix. However Russia is a new country on the calendar for this year, with Austria also making a return, and discussions are on going for a new race in Azerbaijan7 and a further race in the United States.8

Furthermore, there has been a significant amount of adverse publicity from F1 racing in Bahrain, being seen to indirectly support human rights abuses allegedly taking place there. Indeed, in the trial Mr Mackenzie referred to such controversies: “[F1] is a successful investment apart from the adverse publicity.” [129] One can look to FIFA again for an indication of the damage this can do to a sport by awarding the 2022 World Cup to Qatar with subsequent stories of migrant worker deaths during construction for the tournament.9

The Formula One Team’s Association (“FOTA”), the successor to FOCA, has recently folded,10 which in one sense is positive for Bernie’s control of the sport, but for any newcomer could create significant problems when a new Concorde Agreement comes to be negotiated, with the current one due to expire in December 2020. Indeed the first year of this current Concorde Agreement has been largely blamed for the profits of F1 falling by $137m (£82m) to $286m (£170m) from last year,11 which will adversely affect the F1 Group’s attractiveness to a potential buyer from CVC.

Finally, there has recently been an attack on Mr Ecclestone and CVC by a Norwegian sovereign oil fund, who paid $300 million for a 4% stake in the F1 Group from CVC in 2012 upon the belief that the F1 Group was about to be floated on the stock market in Singapore. However, only days after their investment, the initial public offering was cancelled. The chief executive of the $850 billion fund, who very rarely comments on individual investments, said, “[we wish Bernie had been] formally suspended…It’s clear that if [F1] is not handled in a correct manner, we won’t want to be owners any more. We won’t keep sitting on these shares.”12

All of the stakeholders will be following the criminal proceedings in Munich in April with great interest as depending on the outcome it could herald a new, uncertain yet potentially exciting new era for F1.

References

2. This is a result of the European Commission investigation in Formula One case. See Notice published pursuant to Article 19(3) of Council Regulation No 17 concerning Cases COMP/35.163 — Notification of FIA Regulations, COMP/36.638 — Notification by FIA/FOA of agreements relating to the FIA Formula One World Championship, COMP/36.776 — GTR/FIA & others (2001/C 169/03).

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Author

Kevin is a advisor and member of the editorial board for LawInSport, having previously acted as editor. In his day-to-day work he has two roles: as the Principal for his own consultancy business Captivate Legal & Sports Solutions, and Special Counsel for Sports Integrity at leading global sports technology and data company Genius Sports.

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